[Order per : V.K. Asthana, Member (T)]. - These appeals are against four Orders-in-Appeal Nos. 47/95, dated 17-8-1995 passed by the Commissioner (Appeals) and 6/98, 7/98 and 8/98 all dated 23-1-1998 also passed by the Commissioner (Appeals), which had considered Order-in-Original No. 6/95 dated 22-2-1995 and Order-in-Original No. 10/96 etc., dated 5-11-1996 respectively.

2. The Order-in-Original No. 6/95 (supra) finalised the provisional assessments on the following products manufactured by the appellants and cleared for captive consumption :-

(a)     Naphtha

(b)     LSHS;

(c)      Fuel Oil; and

(d)     Refinery Gases.

The appellants had claimed Central Excise duty exemption under Notification No. 217/86, dated 2-4-1986 as amended by Notification No. 61/94, dated 1-3-1994 which had also introduced exemption to goods falling under Chapter 27 of the Central Excise Tariff Act, 1985 with effect from 1-3-1994. The said order also deals with exemption claimed for Naphtha removed for flushing the pipelines and for which duty exemption was claimed under the same Notification.

3. The Order-in-Appeal No. 47/95 impugned deals with the classification dispute i.e. availability or otherwise of the duty exemption noted above, while the Orders-in-Appeal Nos. 6/98, 7/98 and 8/98 deal with the demands quantified in terms of the Order-in-Appeal No. 47/95 and a number of show-cause notices issued quantifying the same. In the Order-in-Appeal No. 47/95, the appellants claim for exemption for LSHS, Fuel Oil and Refinery Gases which were captively consumed to first produce steam, which in turn was used in the manufacture of the petroleum products falling under Chapter 27 was allowed. Further, the appellants claim for exemption on naphtha captively consumed for producing electricity which in turn was used in the manufacture of the final products was disallowed as also the use thereof for flushing. Therefore, the Orders-in-Appeal Nos. 6/98, 7/98 and 8/98 deal with the quantified duty demands flowing out of the earlier Order-in-Appeal No. 47/95 and the demand for duty of Rs. 2,70,13,294/- stood confirmed.

4. Vide Stay Order No. 280/97 dated 9-6-1997, the Tribunal had ordered pre-deposit of a sum of Rs. 23,50,000/- which had been complied on 25-7-1997 by the appellants.

5. Thereafter, vide this Tribunal Miscellaneous Order No. 610/99 and Stay Order Nos. 1026-1029/99 dated 5-7-1999, the Tribunal had noted that as per the directions given by the Committee of Secretaries in the Cabinet Secretariat, the appellants had deposited Rs 1,35,06,647/-. Therefore, the appellants have pre-deposited the two amounts as per the two stay orders noted above, the rest having been waived and stayed by the said interim orders of the Tribunal.

6. In these appeals before us, in view of the narration of events recorded above, only two issues for determination before us are as follows:-

(i)      Whether exemption from Central Excise duty would be available on naphtha captively consumed for generation of electricity etc. which is in turn used in the manufacture of final products falling under Chapter 27 of the Central Excise Tariff in terms of the Notifications mentioned above? and

(ii)     Whether Naphtha captively consumed for flushing of pipelines would be eligible for similar exemptions? The period in question is from 1-3-1994 to December, 1996.

7. Heard Sri Habibullah Badsha, learned Sr. Advocate for the Appellants assisted by Sri C. Manishankar, learned Advocate and Sri S. Kannan, learned D.R.

8. The learned advocate submits that the Orders-in-Appeal impugned have erroneously denied the exemption claimed on naphtha under the said Notifications. With respect to the clearances of naphtha for captive consumption for use in generation of electricity which in turn is used in the manufacture of petroleum products under Chapter 27 ibid, his submissions are as follows :-

(a) A plain reading of the Notification No. 217/86, as amended shows that the Government has conscionsly exempted such products as are listed in column 2 of the table annexed thereto, when the same are cleared for use "in or in relation to the manufacture of the final products" as specified in column 3 of the said table either within the same factory or in another factory belonging to the same manufacturer. In this case, the Naphtha was captively used in the same factory. He submits that the phrase "in or in relation to the manufacture of the final product" needs to be interpreted liberally and in a manner which should include in consideration with respect to any intermediate product arising during the course of such manufacture of the final products. Applying this to the facts of the case, he explained that Naphtha qualifies for the said exemption as an input as it falls under Chapter 27 of the Tariff and the said Chapter 27 is mentioned in Column 2 of the said table. Similarly, when this Naphtha was used captively, first electricity was generated by the hot gases produced on burning it; thereafter in a continuous process the said hot gases were used to drive the turbines which produce electricity. This electricity was, in turn, used for the manufacture of the final products, which admittedly were falling under Chapter 27 of the said Tariff. Since the column No. 3 of the said exemption Notification specifies final products to be those, inter alia, as also falling under Chapter 27, therefore, both the requirements contained in the said table namely the input and the final products was met in this case. He submits that the Naphtha so used was used in the manufacture of the final products and the electricity generated was merely an intermediate product. Since the Notification does not explicitly lay down any condition with respect to the production of intermediate products, but is merely concerned with the use of the input in the final products, therefore, this intermediate product namely electricity, arising during the course of the said manufacture, does not in any way prohibit the applicability of the duty exemption under the said Notification.

(b) In this connection, the Learned Sr. Advocate cites the decision of the Hon'ble Apex Court in the case of IFFCO as reported in (SC) = 1996 (5) SCC 488 and explains that the principle laid down therein by the Hon'ble Apex Court is that excisable goods used indirectly for the manufacture of the specified final products through the medium of any intermediate product arising during the course of the manufacture, would also qualify for the exemption from duty as claimed by the appellants. He submits that the Hon'ble Apex Court had considered the situation where Ammonia had been used even in off-site plant for certain intermediary purposes but since these constituted a necessary part of the process of manufacturing of fertilizers, therefore, the Hon'ble Court had held that they would qualify for the exemption. As the intermediary use was for water treatment, for steam generation and for inert gas generation plants, the Court had held since each of these were necessary part of the manufacturing process of urea (fertilizers), therefore, it is to be held that raw naphtha was used for the manufacture of that fertilizers (Ammonia) and was therefore, entitled to duty exemption. The Hon'ble Apex Court had inter alia relied upon the decision of the Apex Court in an earlier case CCE v. Eastend Paper Industries Ltd. as reported in (SC) = (1989) 4 SCC 244, wherein the Hon'ble Apex Court had considered the question of commercial expediency of such use in the manufacturing process. Applying this decision to the facts of the present case, he submits that firstly in this case raw naphtha was not at all used in any plant off the site, but within the same factory and secondly even if it was used to generate electricity since that electricity was absolutely necessary and was so used in the manufacture of the final products under Chapter 27, therefore, the principle enshrined in the said judgments of the Hon'ble Apex Court would squarely apply to the facts of the present case. The Learned Sr. Advocate submitted that a similar approach was adopted by the Hon'ble Apex Court in their decision in the case of Gujarat State Fertilizers Co. v. CCE as reported in (1997) 4 SCC 140, when they considered the use of ammonia as an intermediate product in the manufacture of molten urea (fertilizers) from raw naphtha. The learned Sr. Advocate also relied on the decision of this Tribunal in the case of Associated Cement Companies Ltd. v. CCE as reported in (T), wherein the Tribunal had considered the question of availability of the Modvat credit under Rule 57A on Sulphuric acid etc. which was used to generate electricity which in turn was used for the manufacture of final product. He submits that though admittedly rule 57A dealt with eligibility to the Modvat credit but the principle therein was the same as Modvat credit was only available to those inputs which were used in or in relation to the manufacture of the final products. The only difference was that in that case the relief was in terms of the Modvat credit whereas in the present Notification the relief was in terms of duty exemption. Therefore, he submits that the principle enunciated by the Tribunal would also squarely apply to the facts of this case.

(c) In this connection, the Learned Senior Advocate draws our attention to an affidavit filed by the appellants in Court to-day, affirmed by one Sri R. Ganesan, who was the Deputy General Manager (Finance) of the appellants. The Learned Sr. Advocate submits that the said affidavit detailed the facts with respect to the manner of use of naphtha in the appellants co-generation power plant in the said refinery. He pointed out that the naphtha was burnt to produce hot gases which were in turn made to pass through the turbines of the electricity generator and the pressure of the hot gases made the turbines rotate, with consequent generation of electricity. He was at pains to point out that thereafter the use of the hot gases in the manufacturing process did not end. Instead these hot gases which had been generated out of naphtha were further channelled through Heat Recovery Steam Generator (HRSG) wherein the heat energy was captured and used to generate steam, which in turn was used for the manufacture of the final products also. The Learned Sr. Advocate, therefore, underlined the fact that the naphtha for which exemption was claimed was not used merely for generation of electricity but also for generation of steam, both of which were thereafter captively used for the manufacture of the final products falling under Chapter 27 ibid. He, therefore, submits that when the Orders-in-Appeal impugned had allowed exemption on LSHS, Fuel Oil and Refinery Gases which were used to produce steam, which steam was then used in the manufacturing process of the final products, the denial in the same orders impugned of exemption on naphtha which also was used partially to produce steam is self-contradictory. He further submitted that whether steam or electricity both were in the nature of the intermediate products, but both were necessary to carry on the manufacturing process of the final products. Therefore, whether naphtha was used to generate Steam or electricity, this fact was immaterial to the issue in view of the fact that both these intermediate products were essential for carrying on the manufacturing process leading to the production of the final products. In this respect, the learned senior counsel also drew the distinction between the words "final products" used both in the body of the exemption Notifications in question as well as in column 3 of the table appended thereto and the word "output". He submitted that the Government had used the word "final products" and not "output" because it was the intention of the Government to link "inputs" specified with the "final products" and not any output appearing at any intermediate stage. This interpretation of the said Notification was also in line with the ratio of the judgments cited above.

9. The learned Senior Advocate, therefore, concluded that the exemption on naphtha contained in the said Notification had been correctly claimed by the appellants and to this extent the Orders-in-Appeal needed to be set aside.

10. As far as the issue of use of raw naphtha for flushing operations in the pipelines is concerned, the learned Sr. Advocate reiterated that the same principle would apply in this case also, as flushing operations were necessary to clean the pipelines in which the crude had to be transported, as without such transportation, the manufacturing operation could not commence. In this connection, he again cited the decision of the Hon'ble Apex Court in the case of IFFCO (supra) wherein in para 9, the Hon'ble Court had ruled that the pollution control equipment was a part and parcel of the manufacturing process of the end product. The learned Sr. Advocate submits that similarly the flushing of pipelines is an integral part of the manufacturing process of the final products. He also submits that what constitutes a manufacturing process and how this concept should be viewed legally was considered at length by the Hon'ble Apex Court in the case of CCE v. Rajasthan State Chemical Works as reported in (S.C.). In para 17 of the said judgment, it was observed as follows :-

"The preliminary steps like pumping brine and filling the salt pans form integral part of the manufacturing process, even though the change in the raw material commences only when evaporation takes place."

The learned Sr. Advocate submits that flushing of pipelines is necessary to render pipelines suitable to transport the raw materials into the distillation unit etc., therefore, even if, the raw material does not get transformed in the said pipelines, but only in the distillation unit after cracking, yet this transportation in pipelines is an integral part of the manufacturing process.

11. The learned D.R. is at great pains to justify the propositions enunciated in the Orders-in-Appeal impugned. With respect to the use of naphtha to produce electricity which in turn is used in the manufacturing process, he submits that the Orders-in-Original as well as Orders-in-Appea1 have clearly held that this electricity so produced was not an excisable commodity. Yet, it was a final product in its own and therefore, since it did not fall under Chapter 27 of the Tariff, or any Chapter for that matter, i.e. it is not covered by the Chapter specified in Column 3 of the table to the Notification, therefore, the exemption has been rightly denied. He also submits that the naphtha which was used in this manner, led inter alia to the production of naphtha again and therefore, both the input and the final products being only of the same type and falling within the same Chapter 27, the exemption was not available. The phraseology of the Notification namely the use of the inputs in or in relation to the manufacture of the final products would suggest that the inputs would have to be products which are different from the final products manufactured. In this case, it is not so. Thirdly, he submitted that the electricity so generated out of naphtha is not being only used for the manufacturing process but is also used for other general purposes in the refinery like lighting etc. As against this, the only use of the steam generated was for directly heating the crude etc. to facilitate the manufacture of the final products. He submits that the Orders-in-Appeal have discussed this issue in great detail and he reiterated the same.

12. With respect to the use of naphtha for flushing of pipelines, the learned D.R. emphasis that such flushing is merely to clean the pipelines. Such cleaning operations have no nexus with the manufacturing process resulting in use of inputs to manufacture the final products. These flushing operations do not lead to the emergence of any final products.

13. The learned D.R. further distinguishes the case laws cited by the Learned Sr. Advocate and submits that none of these judgments were pronounced with respect to the Notification No. 217/86, as amended and therefore, were under consideration of law and facts which were different.

14. We have carefully considered the rival submissions and records of the case including the affidavits filed in court. As the final fact finding authority, we record the nature and extent of use of Naphtha in the manufacture of the final products as appearing before us. Naphtha produced in the appellants factory is partially tapped-off and diverted through pipes to their co-generation plant. This is different from their boiler plant which uses older technology for generation of steam through use of LSHS, fuel oil and refinery gases as fuels, which use of fuel is not a matter in dispute before us. In the co-generation plant, the said naphtha is first burnt in the presence of suitable mixture of air to produce a mixture of hot gases which are captured under high pressure. The availability of this highly compressed mixture of gases is used to drive turbine fans. The rotatory movement generated in the turbine leads to the manufacture of electricity. This electricity is claimed to be consumed within the premises of the plant itself for various purposes which are claimed to be connected with the manufacturing process of final products manufactured therein. The mixture of hot gases , though now under reduced pressure, are further channelled from the outlet of the turbine chamber to a heat exchanging system labelled in the said affidavit as "HRSG". As a consequence of transfer of heat energy from these hot gases to the water contained in the heat exchanger, ultimately the steam is generated. This steam is claimed to be used solely for the purpose of manufacturing operations including the heating of the crude.

15. On a careful consideration of these facts, we find that naphtha is used, therefore, for the production of two intermediate products. Both these products are goods because they are known as capable of being bought out and sold in the market, namely steam and electricity. However, while the steam finds mention in the Central Excise Tariff, electricity is a non-excisable product. The steam is also exempted from duty. Appellants claim that both are used in the manufacturing process and that the said manufacturing process cannot be continued without this use. Therefore, we find that both electricity and steam so produced, though they are intermediate products, they are essential for the completion of the manufacture of the final products. Since the final products manufactured by appellants are admittedly falling under chapter 27 , they would fall within the ambit of column 3 of the table appended to the said notifications. It is also not disputed that naphtha as input is falling under chapter 27 which is mentioned in column 2 of the table. Therefore, the only question before us for consideration is whether such indirect use of naphtha in the manufacturing process would qualify the said naphtha for duty exemption under this notification . In this connection, we find substantial force in the pleadings of Ld. Senior Advocate that the said notification prescribes a system wherein there is a specified input and there are specified final products. Since the notifications has not used the words "outputs" but the words "final products", therefore we find that as long as it can be demonstrated that the inputs have been used to manufacture the final products, the inputs would qualify for the said duty exemption. Therefore, we narrow down to the consideration of a position where such indirect use as is noted above, namely, production of electricity/steam which is used in the manufacturing process would also satisfy the phrase "in or in relation to the manufacture of the final products". We are inclined to hold so. This is because Revenue has not been able to submit before us any evidence showing that the electricity/steam generated is used for purposes which are not essential for and not integrally connected with the manufacturing process. As against this, in the citations relied upon by the Ld. Senior Counsel, the Hon'ble Apex Court has considered such an indirect use in great depth. In the case of IFFCO (supra) the use of the inputs even in water treatment plant which was located off the site has been considered by the Apex Court to be integrally connected with the manufacting process for the simple reason that the availability and use of the said treated water was essential to the manufacturing process. In the present case, we find that the availability of electricity/steam is also similarly essential to the carrying on of the manufacturing process. Therefore, even though that decision was in respect of another exemption notification, the principle enunciated therein would clearly apply in this case also. In this judgment, the Hon'ble Apex Court had kept in mind the decision of the Hon'ble Apex Court in the case of Eastend Paper Industries (supra) which had ruled as follows :-

"where any particular process.......is so integrally connected with the ultimate production of goods that, but for that process, manufacture of processing of goods would be commercially inexpedient, articles required in that process, would fall within the expression ‘in the manufacture of goods'. "

The issue before us is exactly the same. The need for using electricity/steam in this case for refining of petroleum crude is so integrally- connected with the ultimate production of the final products of chapter 27, that manufacture thereof would be commercially inexpedient, if the said energy was not captured in the co-generation plant for producing the steam/electricity and which, in turn , is used in the manufacturing process at various stages. Therefore, we find that the Naphtha used to generate this electricity/steam would fall within the expression "in the manufacture of goods" prescribed in the said notification. A similar position is obtained in the decision of the Hon'ble Apex Court in the case of GSFC (supra) wherein raw naphtha was used first to produce ammonia which was further used to produce molten urea. The use of raw naphtha in this manner for the indirect production of molten urea was held as qualifying for duty exemption for inputs used in the manufacture of fertilizers . The molten urea was held to be such a fertilizer. In the instant case, the naphtha generates steam/electricity which is used to produce the final products. Since in both these situations, the inputs are so indirectly used, the acid test laid down by the Apex Court is not an indirect use but whether this use was essential for emergence of the final products, therefore, we find that the ratio of this decision shall also apply to the facts of the present case. We also find substantial force in Ld. Senior Advocate's reliance in this Tribunal decision in the case of Associated Cement Companies (supra). In the said order, the Tribunal had considered the words "in relation to manufacture" as had been ruled by the Hon'ble Apex Court in the case of J.K. Cotton Spinning & Weaving Mill Co. Ltd. as in (SC) as well as in the case of Rajasthan State Chemicals Works as in (SC) and had held that sulphuric acid used as chemical for treating water which in turn is used essentially for generation of electricity which electricity in turn is used to produce the final goods, then the Modvat credit would be available thereon under Rule 57A. In this connection, we find that the Rule 57A also prescribes the phrase "used in the manufacture of which is similar to the phrase "in or in relation to the manufacture of". Therefore, the principles enunciated in the said decision would be applicable in this case also.

16. In the Order-in-Appeal No. 47/95 (supra), the ld. Commissioner (Appeals) in para-7 thereof has allowed the same duty exemption under this notification with respect to LSHS, fuel oil and refinery gases which also similarly produce steam which in turn is used in the manufacturing process. But we find that in the very next para, i.e. para-8, ld. Commissioner (Appeals) has denied the same exemption on naphtha which, we find, is used not only in the production of electricity but also steam, both of which are used captively in the manufacturing process. Therefore, we find that there is inherent contradiction contained in this order-in-appeal which needs to be set right. It is immaterial whether electricity is an excisable goods or not because it is held that any intermediate product when it is used in the manufacture of the final products, would also be within the ambit of "in or in relation to the manufacture of final products". Then the concept of intermediate products, once the nexus thereof is clearly established with the manufacture of the final products is established, would be immaterial vis-a-vis exemption contained in this notification.

17. Ld. DR has also strenuously argued that since this naphtha is so indirectly used to produce further naphtha after fractional distillation of the crude, therefore both the intermediate and the final products being same and falling under Chapter 27, on that count also the exemption needs to be denied. We would not like to oversimplify this matter in this manner. No doubt, naphtha is the input here, but the naphtha which emerges as the final product, in addition to numerous other final products of Chapter 27, is not the same naphtha which was used as the input but it has arisen at a different stage. Therefore, we find that this argument cannot be allowed to deny the said exemption.

18. As far as the use of naphtha in flushing pipeline is concerned, we again find great force in the submission of Ld. Sr. Advocate. The question of prior use of the input at the stage of manufacturing operations which is either prior or immediately succeeding manufacturing operations is by itself not relevant to the issue as to whether that input has been used in the manufacture of the final product as has been clearly laid down by the Hon'ble Apex Court in the case of CCE v. Rajasthan State Chemicals (supra). The acid test here is whether such use is integral to the manufacturing process. In this case, we find that unless the pipeline is flushed, the raw material (either crude or any other petroleum product) which is to be further processed cannot be transported into the plant where it is further worked upon. Therefore, we find that the flushing which enables the pipeline to become fit for such use is another process which is integrally connected with the manufacturing process of the final product and therefore for the same reasons as discussed above, this use would also qualify for duty exemption under this notification.

19. In view of the aforesaid analysis, and findings, we find full merit in these appeals and therefore we order that naphtha used for the generation of electricity/steam which in turn is captively used in the manufacture of the final products as well as naphtha used for flushing operations of the pipeline in the plant, would qualify for Central Excise duty exemption under the subject notification. Hence the order-in-appeal No. 47/95 (supra) is modified to this extent and the orders-in-appeal Nos. 6/98, 7/98 & 8/98 (supra) passed by Commissioner (Appeals) are set aside. Ordered accordingly.

20. Appeals are allowed with consequential relief as per law in the above terms.